Passive Income Advice/Help

[JohnOvan]

Hello everyone, nice to meet you all!

I live in the UK right now, so I will use GBP most of the time.
I just registered to ask this question, which is mainly, what would be the fastest way to achieve a passive income through investments? My goal is to "make" 2000 GBP a month, thus I will be able to do whatever the hell I want (reinvest, charity, traveling by simply walking etc.)

I know 2000 GBP sounds a lot per month, but honestly I could retire with about 1000 GBP of passive income and just build up from there.

As of now I am studying Forex, and trying to earn a few drops there.

Here is what I earn and spend in a month:
(Please note these are averages)

Passive Income: 0 GBP
Level 1 Slave: 1050 GBP (after taxes)

Housing: Living with 5 other people, I rent a room for 340 GBP a month.
Transport: Only using Top-up Oyster cards, 2.90 GBP/day which is roughly 67 GBP/month.
Food: I used 50 GBP a month, but now I try to use as little as 20 GBP. This means I fast 20/30 days, and eat normally 10/30 days.

This adds up to 427 GBP at the moment, but I like to keep 500 on my regular account for emergencies, which seldom happen.

I followed a simple rule; save first then manage, and was able to save up to 7200 USD since I came here (about 10 months ago), which I use in Forex right now. I am 23, earning minimum wage only.

Thinking of buying a bicycle to reduce travel costs.
Please advise, what do you think? Where could I go from here?

Thank you very much in advance, I look forward to your replies/critique!

[Dragline]

Unfortunately, the "fastest way" is more often than not the "riskiest way", which means you could make a lot or lose a lot in a heartbeat. Of course, if you become a whiz at some aspect of trading, then you won't need our help!

I'd suggest you start with the investments wiki: http://earlyretirementextreme.com/wiki/ ... nvestments However, its geared more towards US investors. I think there are some threads for UK.

Your main goal at first should be accumulation, including capital gains, not income per se. The general rule of thumb for a 30-year retirement is to have 25 times your annual income saved. [2K x 12 months x 25 = 600K] Jacob recommends 33 times annual income for a never-ending retirement. For endless discussion of those metrics, search "SWR" (safe withdrawal rate).

For something even more interesting, try George's Leveraged Income thread. As you can guess, there's more than one way to skin this cat, and even more ways for the cat to skin you.

[chipmunk]

Set a goal to save as much as you can over the next few months. Put the money in something safe and boring, like a savings account. Read up on investing. This includes books, websites, and forums. Then start investing.

I'll have the second the notion that the fastest way is almost surely the riskiest way.

[IlliniDave]

That's a simple question with a complicated answer. The fastest and arguably safest way to do it is keep your expenses low and save/invest as aggressively as you can in a diversified portfolio of stocks and bonds. Many people use rental real estate as well, but depending on your definition of "passive" rental properties may or may not be something you want to consider.

Just to give you a sense of things

I'm in the USA, and conventional wisdom says the safest/steadiest income producing financial asset is US Treasury bonds. But because they're safe the returns are relatively low, but they provide a dependable and predictable periodic payment. To generate 24000 GBP/yr you need to have over 1M GBP in intermediate-term treasuries. I don't know the bond market in the UK but I'd guess it's similar. Stocks have the potential for higher average returns, but their value can lurch up and down in a stomach-churning fashion.

If you're just starting out, in reality you're probably looking at a couple decades minimum to build that kind of investment income.

The two things you need to do is increase your income above minimum wage and either lower your passive income goals, or be prepared for the proverbial journey of a thousand miles, and take it a single step at a time.

[JamesR]

Since you're young & flexible, your goal is probably to save up approximately 5% Safe Withdrawal Rate or better. That's the equivalent of a 20 year emergency fund.

Currently you're at a 50% savings rate, which isn't great because you're only saving 1 year's worth of emergency funds per year. Bump it up to 75% and you'll be saving 3 years every year, or 80% and you'll be saving 4 years every year.

If you had a savings rate of 80%, then in 5 years, you would have saved up 4*5, or 20 year emergency fund.

Your biggest issue right now is income. Focus on developing rare & valuable skills and get higher paying work. Forex/Gambling won't necessarily help much, and you have to be careful about it because you could easily get a winning streak and then assume you actually know what you're doing... If you do forex, read up on kelly bet sizing, learn risk management.

[JohnOvan]

Thank you,

For now, I think I'll just stick to studying more on finances (it'd be sensible to do so, I agree) while working on increasing my income and savings rate, and trying to hold my horses for a bit. There is a lot on these subjects, even just here on these forums (like the leveraged income thread) and it seems I got a bit ahead of myself.

As with forex, right now I am not the one who trades (but I still manage stops).

The Wiki is awesome, and the blog is very informative in itself as well.

May I ask, what is your opinion on Dogs of the Dow? As I understood it would be good for a dividend investment in the long run, with minimal management.

[Dragline]

It's not bad for a stock strategy. You won't lose your shirt, which really is the most important thing.

For long term investing, I like strategies that involve investments that are uncorrelated. A simple one is 50-70% stocks and the remainder long-term bonds in your favored currency. Others include the "Permanent Portfolio" or having some percentage devoted to real estate, commodities or something else (I like peer-to-peer lending, but I'm not sure you are allowed to do that in the UK). I think having 2-4 uncorrelated investments is ideal, although many branch out into even more.

[JohnOvan]

Sorry for my late reply,

I really liked the idea of the Permanent Portfolio (although I haven't read the book yet), and would be really happy if I could reach something similar to what you mentioned.

As of now (until I get to be 40) I plan to build a diverse portfolio mainly of Dogs of the Dow stocks, some gold, and bonds for a longer term. Also going for some real estate in the future would be good, where I could just lay back and build stuff.

Which would be the most beneficial order of acquisition for the above mentioned "plan"?
I was thinking of going for bonds-->stocks-->gold-->land and house (this would be the most time consuming as I would like to build one).

Or, should stocks be the first ones as I may get dividends from them, which would increase over time?

Thank you very much, through all of you guys' help I feel I am finally on the right track.

[IlliniDave]

Sorry for my late reply,

I really liked the idea of the Permanent Portfolio (although I haven't read the book yet), and would be really happy if I could reach something similar to what you mentioned.

As of now (until I get to be 40) I plan to build a diverse portfolio mainly of Dogs of the Dow stocks, some gold, and bonds for a longer term. Also going for some real estate in the future would be good, where I could just lay back and build stuff.

Which would be the most beneficial order of acquisition for the above mentioned "plan"?
I was thinking of going for bonds-->stocks-->gold-->land and house (this would be the most time consuming as I would like to build one).

Or, should stocks be the first ones as I may get dividends from them, which would increase over time?

Thank you very much, through all of you guys' help I feel I am finally on the right track.

I believe in much more stock diversification than you'd get out of the "Dogs" strategy, and since gold produces no return (an ounce of gold is still an ounce of gold in 30 years), it's not something I like to hold and have no experience with.

That said, right away I would start to build up a mix of stocks and bonds in parallel, and become familiar with the idea of rebalancing (it's not a requirement but worth considering, especially in tax-advantaged accounts). I wouldn't buy/build land/a home for myself until there was a compelling lifestyle reason to do so. I am a homeowner, but I don't count my house as an investment per se (I know some do, it's a matter of personal preference). In general residences are purchased in parallel with longer term financial investments. For most people in most parts of the country the financial assets have a better chance to grow fastest, and have the advantage of being highly liquid, so I'd give them the nod for first priority. If you are/get married and start a family, priorities could shift somewhat.

[JohnOvan]

Thank you for your help.

For now, I will concentrate on saving as much as possible, lowering my expenses just to cover necessities.

At last I think I have a "plan" of sorts, I quite like the stock-bond parallel (on which I will have to study a lot more). The house/land subject will have to wait until I retire completely,meaning my 50s or 60s. Finally, I will hold some gold/silver in a safe, accessible place of a reasonable value, just because god knows what might happen in the future. I really don't like where this system (society) is going, it is better to be safe than sorry.

In the meantime, I will lurk around this forum, as it is quite awesome so far. Thank you all for helping me out, and setting a few things straight!

[riparian]

If $1050/month is your realistic best potential in the job market I would look outside the job market. You can make more or as much as that doing most kinds of Internet freelancing, dog walking, house cleaning, etc. You'll need a new set of skills (marketing) but that can potentially take you much further and faster into the world of passive income. (For example I turned some of my journal entries into two short ebooks which, with a minimum of marketing, provided me with a stable $1k/m for the first year or so and about $700/m now a couple years later. When I release a third and market it my income will go up again. Since I don't have a huge savings account or high paying job I find this more valuable than investing knowledge.)

[jacob]

Consider how the payoff is structured.

Wages pay large amounts upfront in exchange for time, but once they are paid, you don't get another cent.

Investments usually delay payments for months or years and the payout scales directly with the size of your investment. You'd have to wait equally long to get $3000 from a $10000 invest as would would making $150000 from a $500000 investment.

Business returns that rely on a customer base or a product catalog (but not your direct time, see wages) tend to scale exponentially depending on how much work you have put into it. Again, the payoff is neither linear in time nor immediate.

So it would stand to reason that the best strategy is to
1) Get a job income and start saving the money to scale investing up.
2) While doing that start building your product line because this could take several years.
3) Once your money is scaled up it might make sense to figure out how to get better return if you believe such a thing is possible. Again 5% outperformance on $10000 is $500 which is not much if it takes thousands of hours of study to achieve. However, 5% extra on $500000 is real money.

[riparian]

Business returns that rely on a customer base or a product catalog (but not your direct time, see wages) tend to scale exponentially depending on how much work you have put into it. Again, the payoff is neither linear in time nor immediate.

That's not necessarily true in the digital age. One can acquire a customer base overnight by being featured on boingboing or buzzfeed or by listing one's products with amazon or e-junkies. There's definitely a learning curve and it takes work, but with a little strategy it doesn't seem to take as much work as people tend to think.

[7Wannabe5]

There are also passive income opportunities where you make your money because you made a good find or deal on the buying end but then you passively wait for the sale. For instance, the NRV (net realizable value) of my rare used book inventory tends towards declining over time due to storage costs and competition but since my acquisition price was a fraction of my retail price, my ROI (or hourly wage depending on perspective) is still relatively high even though I get no benefit of compound interest. Analogous to hunting and drying morels vs. growing day lilies (they double and can be split each year.)

[jacob]

@riparian - Given no previous hookups, getting discovered by social media is a bit like winning the lottery. You gotta work to write your own tickets and hope one of them wins. The more tickets, the greater the probability.

In terms of income, I think it takes the average blogger 6 months to make their first $100 total. A few then go on to make five or six figures within a year, but most go back to coffee money. The net also turns the payoff into a rock star+long thin tail extreme Pareto distribution. Most make nearly nothing and a single person or book is hard to find in a sea of others.

[riparian]

@riparian - Given no previous hookups, getting discovered by social media is a bit like winning the lottery. You gotta work to write your own tickets and hope one of them wins. The more tickets, the greater the probability.

Some marketing plans are better than others, but they're definitely more like plans than lottery tickets. I mean, read 3 books about marketing on the Amazon system and then give it a go. You'll definitely do better than blogging cause amazon has customers.